I had high hopes that Presidential candidate Mitt Romney might have a compelling plan to fix
the U.S. economy.

After all, as Romney often observes, he has spent most of his
life working in the private sector, buying and restructuring
businesses.

And Mitt Romney's
overall economic plan certainly does have some positive
points, at least with respect to streamlining the economy over
the long term.

But unfortunately, Romney's plan is not likely to help the
economy out of its current funk.

Romney's plan, in fact, suggests that Romney
does not actually understand what's wrong with the economy.
The solution he is proposing--giving rich people and companies
more cash to spend and invest--will not solve the problem the
economy faces right now. So Romney's policies, if fully
implemented, aren't likely to help anything.

(In fact, arguably, they will make things worse.)

Specifically, Romney's policies are designed to give more money
to wealthy Americans and companies, on the theory that they
will then use this cash to invest in other companies and create
jobs.

This treatment plan ignores two important things:

The wealthiest Americans and corporations already have
plenty of cash to invest. The reason they are not
investing it aggressively is not that they don't have it--it's
that the investments won't produce a compelling return (because
the customers of the companies they would be investing in,
average Americans, are strapped).

Contrary to common wisdom, rich people do not
create the jobs in this country. Rich people
(investors) help create jobs, but no sustainable job
is created without the help of a healthy economic
ecosystem--one that depends heavily on the financial health of
hundreds of millions of American consumers.

The argument that "rich people create the jobs" is repeated so
often that many people regard it as fact.

Specifically, the argument goes, entrepreneurs and investors,
when incented by low taxes, build companies and create millions
of jobs.

And these entrepreneurs and investors, therefore, the argument
goes, can solve our nation's huge unemployment problem — if only
we cut taxes and regulations so they can be incented to build
more companies and create more jobs.

In other words, this thinking goes, by even considering raising
taxes on "the 1%," we are considering destroying the very
mechanism that makes our economy the strongest and biggest in the
world: The incentive for entrepreneurs and investors to build
companies in the hope of getting rich and, in the process,
creating millions of jobs.

There have long been many problems with this argument starting
with

Taxes on rich people (capital gains and income) are,
relative to history, low, so raising them would only begin to
bring them back in line with prior prosperous periods,
and

Dozens of rich entrepreneurs have already gone on
record confirming that a modest hike in capital gains and
income taxes would not have the slightest impact on
their desire to create companies and jobs, given that
tax rates are historically low.

So this argument, which many people regard as fact, is already
flawed.

But last year, a super-rich and super-successful American
explained the most important reason the theory is
absurd, while calling for higher taxes on himself and people like
him.

The most important reason the theory that "rich people create the
jobs" is wrong,
argued Nick Hanauer, the founder of online advertising
company aQuantive, which Microsoft bought for $6.4 billion, is that
rich people cannot single-handedly create sustainable
jobs, even if they found and build companies that
eventually employ thousands of people.

What creates the jobs, Hanauer astutely observes, is a healthy
economic ecosystem surrounding the company, which starts with the
company's customers.

The company's customers buy the company's products, which, in
turn, creates the need for the employees to produce, sell, and
service those products. If those customers go broke, the demand
for the company's products will collapse. And the jobs will
disappear, regardless of what the entrepreneur does.

Now, of course entrepreneurs are an important part of the
company-creation process. And so are investors, who risk capital
in the hope of earning returns. But, ultimately, whether a new
company continues growing and creates self-sustaining
jobs is a function of customers' ability and willingness to pay
for the company's products, not the entrepreneur or the investor
capital. Suggesting that "rich entrepreneurs and investors"
create the jobs, therefore, Hanauer observes, is like suggesting
that squirrels create evolution.

(Or, to put it even more simply, it's like saying that a seed
creates a tree. The seed does not create the tree. The seed
starts the tree. But what creates the tree is the
combination of the DNA in the seed and the soil, sunshine, water,
atmosphere, nutrients, and other factors that nurture it. If you
don't believe this, try planting a seed in a desert, or on the
moon. The seed won't create anything. It will die.)

So, then, if what creates the jobs in our economy is, in part,
"customers," who are these customers? And what can government
policy do to make sure these customers have more money to spend
to create demand and, thus, jobs?

The customers of most companies, Hanauer points out, are
ultimately the gigantic middle class — the hundreds of millions
of Americans who currently take home a much smaller share of the
national income than they did 30 years ago, before tax policy
aimed at helping rich people get richer created
an extreme of income and wealth inequality not seen since the
1920s.

She'd like to create jobs. But she can't
afford to anymore. Click to see how extreme inequality has
gotten.

The middle class has been pummeled, in part, by tax policies that
reward "the 1%" at the expense of everyone else.

(It has also been pummeled by globalization and technology
improvements, which are largely outside of any one country's
control.)

But aren't the huge pots of gold taken home by "the 1%" supposed
to "trickle down" to the middle class and thus benefit everyone?
Isn't that the way it's supposed to work?

Yes, that's the way it's supposed to work.

Unfortunately, that's not the way it actually works.

And Hanauer explains why.

Hanauer himself takes home more than $10 million a year of
income. On this income, he says, he pays an 11% tax rate.
(Presumably, most of Hanauer's income is dividends and long-term
capital gains, which carry a tax rate of 15%. And then he
probably has some tax shelters that knock the rate down the rest
of the way).

With the more than $9 million a year Hanauer keeps, he buys lots
of stuff. But, importantly, he doesn't buy as much stuff as
would be bought if that $9 million were instead earned by 9,000
middle-class Americans each taking home an extra $1,000 a
year.

Why not?

Because, despite Hanauer's impressive lifestyle — his family owns
a plane — most of the $9+ million just goes straight into the
bank (where it either sits and earns interest or gets invested in
companies that ultimately need strong demand to sell products and
create jobs). For a specific example, Hanauer points out that his
family owns 3 cars, not the 3,000 that might be bought if his $9+
million were taken home by a few thousand families.

If that $9+ million had gone to 9,000 families instead of
Hanauer, it would almost certainly have been pumped right back
into the economy via consumption (i.e., demand). And, in so
doing, it would have created more jobs.

Hanauer estimates that, if most American families were taking
home the same share of the national income that they were taking
home 30 years ago, every family would have another $10,000 of
disposable income to spend.

It's time we stopped mouthing the fiction that "rich people
create the jobs."

Rich people don't create the jobs.

Our economy creates jobs.

We're all in this together. And until we return to more
reasonable tax policies that help the 99% instead of just the 1%,
our economy is going to go nowhere.

Mitt Romney's plan to fix the economy would put more cash in the
pockets of the wealthiest Americans and take cash and benefits
out of the pockets of everyone else.

No one likes paying taxes, so it's no surprise that so many
wealthy Americans support Mitt Romney. And there is also
certainly an argument to be made that our government is too big
and that one way to start curtailing the size of government is to
cut taxes and deprive the government of revenue.

But that's a different issue than whether Mitt Romney's plan will
help fix our ailing economy.

Unfortunately, given that the problem in the economy is not that
wealthy investors and companies don't have enough cash but that
the middle-class doesn't have enough cash, it probably
won't.

PS: This argument usually strikes a nerve,
especially among wealthy entrepreneurs and investors who have
always been credited with "creating jobs." The two smartest
arguments made by those who believe that rich people DO create
the jobs are that 1) the success of Silicon Valley proves that
entrepreneurs and investors create the jobs, and 2) the
observation that brilliant entrepreneurs like Steve Jobs create demand out of thin air by
inventing products people didn't know they wanted. These
arguments sound seductive and persuasive, but they miss the key
point. Click this follow-up to see why:
No, Entrepreneurs Like Steve Jobs Do Not "Create Jobs" By
Inventing Products Like The iPhone